In our last post, we examined the growing retail financing market. We noted that credit cards continue to be a significant payment vehicle for consumers, but there is tremendous growth in point of sale/point of purchase financing. Retailers – both online and in-store – are offering personal installment lending as an alternative payment channel for individuals, and people are paying attention.
Billions in Potential
In Part 1, we noted that personal loans are growing in double digit percentages, but what is the market potential? That depends on who you ask. Estimates for the market size range from “$391 billion, or approximately 3.5% of annual consumer spending”[i] to $1.8 trillion.[ii] Globally, estimates range as high as $6 trillion.[iii]
Even on the low end of that spectrum, banks, fintechs and other financial institutions (FIs) can reap significant reward in POS lending. JPMorgan chase “indicated in an investor presentation that there is $250 billion in outstandings not held by Chase”[iv] and is working to tap into that potential revenue. Companies like GreenSky and Klarna are actively engaged in the POS market, with reported revenues at $414.7 million (Greensky) and $627 million (Klarna).
No wonder, then, that other companies are looking closely at the market. But how can a company without an existing presence break into the space?
Launching a POP/POS/BNPL Financing Solution
For banks, the segue into a POP/POS/BNPL line of business can follow several different paths, whether they rent out balance sheets, join a marketplace or become an end-to-end solution provider.[v] The end-to-end approach can work for some of the largest FIs, like Chase. They’re actively pursuing services that will enable cardholders to “choose among past card purchases of $500 or more and to finance them for longer periods for a fee, rather than paying interest.”[vi]
This route makes sense when you have an established customer base using another product (in this case, credit cards) and you want to tap consumer preference for set repayment terms. However, it is resource intensive, making it a challenging option for companies with less human and financial capital to invest.
For other retailers and FIs, partnerships are an attractive option. Many traditional banks are already working with established fintech providers like Greensky, Klarna, Affirm and others to get a foot in the POS door. These symbiotic partnerships can dramatically reduce time-to-market by eliminating a technological deficit that a traditional bank may have. Partnerships also benefit both the bank and the fintech provider, making them a win-win approach to capturing this market segment.
Launching any solution also requires clearing some logistical hurdles at the actual point of sale. Some retailers have baked their financing offers right into the checkout process, so customers can apply for fixed-term loans during checkout or through the store’s website. Other lenders make it easy to apply for and receive financing through a smartphone, so consumers can confidently make high-dollar purchases with a loan they already secured.
No matter the route, key themes in retail financing are ease, convenience and transparency for consumers. Advances in technology have “created the ability to check credit records and weigh a consumer’s relative risk almost instantly,”[vii] so lenders can make immediate offers and present them to interested buyers in the heat of the moment.
Convenience comes into play when retailers and lenders make financing options available through websites, checkout terminals and mobile devices, allowing individuals to apply when and where they want. And the transparency of set terms and payment conditions addresses “consumers’ confusion over how the annual percentage rate (APR) works”[viii] for other options like credit cards.
Economy and Scale
POS/POP/BNPL lending has some significant economic impacts. From a retailer/lender perspective, the impacts are largely positive; consumers who use financing generally spend 35% more in average ticket size and 15% in average sales.[ix] It’s not just big ticket items that buyers are financing, either. A recent McKinsey article notes that “smaller ticket (less than $500) POS loans…are growing at rates exceeding 40 to 50 percent.”[x]
But some economists are sounding the alarm bells. Mark Zandi, chief economist at Moody’s Analytics, notes of the rapid growth in personal loans: “Definitely yellow flares should be starting to go off.”[xi] One of the reasons for the concern is that these loans are unsecured, and have no assets that a lender can use to recuperate costs if a buyer defaults on payment.
Another concern is that consumers continue to accrue debt through other channels (like credit cards) in addition to the personal loan. As Lauren Saunders, associate director of the National Consumer law center notes, this can put individuals in “a worse situation with credit card debt and installment loans on top of it.”[xii] This can be particularly dangerous for an individual that experiences an unexpected financial hardship like losing a job or a medical emergency – costs can quickly outstrip their ability to keep up with outstanding debt.
Despite the potential risks, this kind of financing does not appear to be on the cusp of collapse. Growth is robust, and while delinquency rates of 3.3% are higher than rates for credit cards, mortgages and auto loans[xiii], they remain significantly lower than the historical “8.4 percent delinquency rate in January 2008.”[xiv]
Lending for the Long Term
All the signs seem to point to one conclusion: POS/POP/BNPL financing is big business, and it is here to stay. FIs that want to capitalize on this trend need to move sooner than later, to capture and retain market share. Whether they buy, build or partner, FIs cannot wait for the consumers to approach them. Those that move quickly today will be the leaders of tomorrow.
 Growth Trends in Retail Consumer Financing for 2017, First Annapolis Consulting, June 2016.